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use extra cash to payoff High APR Credit Card or new mortgage first?

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use extra cash to payoff High APR Credit Card or new mortgage first?

info: Credit Card- 24%APR Balance- 2500 minimum payment $76/mo

Mortgage- 6%APR Balance- 127,000 payment-$750/mo

I understand it's usually best to payoff highest interest debt first, but i I'm wondering because putting extra money towards your mortgage (or any loan) benefits you much more if you do it sooner in the life of the loan than later. I understand the same prinicpal applies to paying off the card faster, but does the fact the mortgage has a much higher balance make a difference? Even with a much lower interest rate than the card? I have an extra 500 a month to put towards debt. Does it save me more money in the long run to payoff the credit card right away, or put that 500 towards the mortgage right away and let the card run its course? 

Message 1 of 5
4 REPLIES 4
Valued Contributor

Re: use extra cash to payoff High APR Credit Card or new mortgage first?

No, it makes no difference that the mortgage balance is higher.  The interest is on the $2500, no matter where it sits.

 

Pay off that credit card first.

 

The interest accrues on money owed...no matter what the account...and that high-rate APR balance should be killed off fast.

 

Smiley Happy  Welcome to the forum!

 

 

By the way, paying down the credit card will probably give you a score boost, too!  I don't know what other balances you may carry, or your utilization, but credit card debt paydowns are a good thing, no matter what.

Message 2 of 5
Regular Contributor

Re: use extra cash to payoff High APR Credit Card or new mortgage first?

Pay off the credit card. 

 

Yes, you benefit more on your home loan by paying principle down sooner, but that's a very simplistic view of it.  The reason you benefit is because you're paying 6% of the total balance every year.  So the quicker you pay it down, the less you'll pay each year.  But it is no different than the CC, except you're paying 24% instead of 6%.  If you only pay minimums on the CC, I'm sure it would take you 20yrs or so too in order to pay off. 

 

If you're strictly looking at it from a money perspective, as in how much you'll save, you pay high balances first, regardless of anything else.

 

There's one other benefit to paying down the CC first.  You free up cash flow each month.  You pay towards a mortgage, your monthly payment doesn't change.  You pay off the credit card to $0, you then have that $76 minimum (or whatever you're actually paying, hopefully more) to put towards whatever you want.

 

 

Message 3 of 5
Valued Contributor

Re: use extra cash to payoff High APR Credit Card or new mortgage first?

The only reasonable way to pay a 24% CC is to Pay In Full and never pay that interest rate.

 

You should pay off the CC ASAP, even if the interest rates were the same. Revolving debt hurts you credit more and the interest on your primary residence is deductable.

 

Additional payments on a Mortgage help more when made early since you pay interest on the remaining balance BUT that only benefits you when you have no other debt that costs more.

Message 4 of 5
Valued Contributor

Re: use extra cash to payoff High APR Credit Card or new mortgage first?

+1 to what GregB said!

 

Ray

Ray

** Every Card has a Job, and Every Card does its Job **
Message 5 of 5
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